Estate planning often brings with it a cloud of uncertainty, especially when it comes to the financial legacy we leave behind. Executives and professionals often worry about the tax burdens their children or beneficiaries might face upon inheriting their assets. This concern, while founded in genuine care, stems from prevalent misconceptions about estate taxes. For instance, it’s commonly believed that death invariably triggers significant tax implications that complicate the grieving process for your loved ones.
However, the truth is more nuanced. In most cases, the tax obligations of an estate are managed through the proper distribution of assets, meaning your heirs might not face the daunting tax burdens you imagine. Nonetheless, failing to understand the specific tax rules that apply to different assets can lead to unintended financial consequences and emotional stress for your family. (Read more here)
By becoming informed about how various assets are taxed upon your passing—be it your family home, investment accounts, or superannuation—you can take steps to ensure your estate is managed in a way that aligns with your wishes and minimises the financial impact on your beneficiaries.
Let’s explore how different assets are handled at death and how you can prepare effectively, ensuring a smooth transition and lasting peace of mind for those you care about most.
Understanding Tax Implications on Death
Understanding what tax implications might befall your children on death, requires knowledge of not just what forms part of your estate, but the tax implications of each of these. Here’s a brief look at the tax implications for different types of assets that might be passed to your children.
Bank Accounts and Cash
The simplest of all, bank accounts and cash holdings are generally passed to beneficiaries without any additional tax implications. These amounts are not considered income for tax purposes, thus not needing to be reported in your children’s tax returns. This ensures that cash assets can be a straightforward and immediate support for your heirs.
Family Home
Under Australian tax law, if your family home was your primary residence, it generally doesn’t attract any capital gains tax (CGT) upon your passing. Moreover, your executor has a grace period of two years to sell the home tax-free, even if the property is rented out after your passing, during this period. This exemption aims to provide flexibility and time for your executor to make the best decision in the interest of your beneficiaries.
Investment Assets Including Investment Properties and Shares
Investment assets, such as properties and shares, are subject to different rules based on their acquisition date.
Assets acquired before the introduction of CGT on 20 September 1985 are treated differently from those acquired afterwards. For assets purchased before this date, the cost base for CGT purposes becomes the market value at the date of your death.
For newer assets, the original cost base—including purchase costs like stamp duty or brokerage fees—carries over to the cost base your beneficiaries inherit. This means if your heirs decide to sell these assets, the CGT they may owe will depend on these cost bases and the asset’s value at the time of sale.
Inheriting investment assets like property of shares, does not generally result in any tax payable by your children, unless they sell the investment (in which case they’ll have the proceeds to pay for any associated taxes).
Executive Share Schemes
Shares from executive share schemes (ESS) are taxed similarly to other investment assets; however, specifics can vary if shares are unvested at the time of passing. Under ‘good leaver’ provisions, a pro-rata number of shares may vest immediately, effective at the date of your passing, creating a taxable event that needs to be handled in your final tax return managed by your executor (before any resulting ESS shares or cash from the sale of these shares are distributed to your children from the estate). This highlights the necessity of keeping meticulous records, as online access to share scheme accounts is often revoked soon after an individual’s death.
Superannuation
The tax treatment of proceeds from superannuation largely depends on the beneficiary. If benefits are passed to a spouse or minor children, they are typically received tax-free. However, benefits received by non-dependent adult children involve more complexity. Such benefits are split into taxable and tax-free components, with the taxable portion subject to a 15% tax plus the Medicare levy. Effective planning may help minimise the tax impact, such as considering withdrawal and re-contribution strategies to optimise the tax-free component of the superannuation fund, or structuring your estate to consider children both under and over the age of 18.
By understanding these nuances and preparing accordingly, you can significantly alleviate the potential tax burdens on your estate, ensuring your assets support your beneficiaries in the most effective way possible.
Life Insurance
Life insurance proceeds offer a beacon of financial relief, generally passing to beneficiaries free of tax, thus providing crucial support during challenging times. However, if the insurance policy is tethered to business purposes, such as funding buy/sell agreements, the implications can differ. In these cases, the proceeds may be subject to tax if they’re linked to the exchange of business shares or related agreements. It’s imperative for you to understand these distinctions to ensure you understand what, if any, tax consequences may exist on any Life insurances you have in place.
Safeguarding Your Legacy: The Importance of Estate Planning
Neglecting proper estate planning can have far-reaching consequences, affecting more than just the financial outcomes for your beneficiaries. Without a well-considered plan, estates can be subject to prolonged probate and distribution processes, leading to unnecessary costs, substantial tax liabilities, and familial discord during a distressing time. Moreover, beneficiaries might face the need to hastily liquidate assets to cover tax bills, potentially eroding the intended financial security. In the absence of strategic planning, significant portions of your estate could be consumed by taxes and legal fees, diverting resources away from your family’s future. Proactive estate planning is essential to prevent these adverse outcomes, ensuring your assets are preserved and passed on according to your wishes.
Next Steps: Taking action
To ensure your estate planning aligns with your financial goals and provides for your loved ones as intended without unnecessary tax outcomes, the next step is straightforward: schedule a consultation to understand your position and the resulting position of your beneficiaries. Engaging with a professional who understands the intricacies of estate taxation and structuring will help identify potential tax implications for your beneficiaries and explore strategies to reduce taxes to the extent you’re able to influence the outcomes.
I invite you to give me a call on +61 (0) 7 3007 2080 or email contact@executivestrategies.com.au to request a call back.
Executive Strategies is a specialised information hub for executives and senior managers who may have founded their own business or who work for growing private, ASX listed companies or government businesses. Its purpose is to provide access to specialist advisers and information that addresses the often-complex issues affecting their personal prosperity.
James Marshall is a financial adviser and specialised ESS strategist. To learn more about James Marshall, visit this link.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth ABN 54 139 889 535 AFSL 357306. This advice is general and does not take into account your objectives, financial situation or needs. You should not act on it without first obtaining professional financial advice specific to your circumstances.
Please note: For advice and services relating to this matter that are not offered under the Fortnum Private Wealth AFSL, in accordance with our collaborative advice model, when required, such matters are referred to appropriately qualified professionals.
